Activist investor Barry Rosenstein ditched his entire stake in Valeant Pharmaceuticals right before the shares plunged.
The drugmaker’s shares had been a big performance driver for Rosenstein’s Jana Partners.
The fund first bought 4.3 million shares of Valeant in the fourth quarter of 2014. In the spring of this year, the fund pared back its position to 1.57 shares. Jana held 1.34 million shares of Valeant at the end of the second quarter, regulatory filings show.

His September exit came at the right time.

Here’s Jana, in its quarterly letter to investors:

“When the facts do change, we react. A case in point is Valeant Pharmaceuticals International, INC (VRX). We established our position in the fourth quarter of 2014, and closed out the position in September. Year to date, Valeant has been the biggest positive contributor to performance. The situation for Valeant changed dramatically in September, when its drug pricing practices were called into question by Hillary Clinton. Valeant had been under scrutiny for months, and in retrospect we should have been more acutely attuned to the importance of the inquiry into the price increases on certain Valeant’s drugs by Senator Sanders and Representative Cummings that surfaced in August. We had reduced our Valeant position meaningfully earlier in the spring and summer as it approached our price target, and we felt more comfortable with our smaller position. When Valeant’s business practices were conflated with those of Turing, whose founder painted himself and his company (and by extension Valeant) as a nearly political target, we recognised that Valeant’s business model would be forced to change in ways we could neither anticipate nor forecast and decided to exit completely, thereby avoiding an approximately 40% further drawdown in the stock.”

Valeant had been a hedge fund favourite, but lately it’s been a hedge fund horror. It ranked No. 10 on Goldman Sachs’ stocks that “matter most” to hedge funds list for the second quarter. According to Goldman, 32 funds had the stock as one of their top-10 stock holdings.

Some of the stock’s big holders include Bill Ackman of Pershing Square and long-time activist investor Jeff Ubben of ValueAct. Ackman, the founder of Pershing Square, has lost around $US1.9 billion on paper since taking a large stake in the first quarter of this year.

On Friday, Ackman spent nearly four hours hosting a call defending his investment, noting that the stock is “tremendously undervalued” and has an “89% upside.”

Shares of Valeant have cratered more than 40% since Citron Research, a California-based short selling firm led by Andrew Left, published its report two weeks ago suggesting Valeant may be operating as an Enron-like fraud.

Citron’s report focuses on the company’s relationship with Philidor, a specialty pharmacy that distributes prescription drugs for Valeant. Valeant is the only supplier to Philidor, and it also has an option to buy the company. No one on Wall Street had really heard of Philidor until earlier this month.

Citron has accused Valeant of using Philidor to create “phantom sales” of its products.

Valeant has denied the allegations in the original Citron report. On Friday, Valeant also said it would sever “all ties” with Philidor.

Before the Citron report, Valeant’s share price had already come under pressure after it had been criticised for its drug pricing. The company has also been compared to Turing Pharmaceuticals, a biotech start up run by controversial CEO Martin Shkreli who increased the price of a critical drug from $US13.50 to $US750 overnight.

In late September, Democrats on the House Oversight and Government Reform Committee sent a letter to the committee’s chairman, Jason Chaffetz (R-UT), asking him to subpoena Valeant for documents related to price increases of acquired drugs.